OECD puts GST at top of tax reform list

The Organisation for Economic Co-operation and Development’s latest call for changes to Australia’s tax system contains few details, but the agency previously urged the government to raise the goods and services tax rate.

The agency didn’t say what taxation changes were recommended, but in a submission to the federal government’s tax forum in October 2011, senior adviser for the OECD Centre for Tax Policy and Administration Richard Highfield said GST reform was “essential" to a broader tax reform policy.

“Today’s GST exists, effectively, as an under-utilised and seemingly ‘unloved’ appendage to Australia’s tax system, because of the perceived political downsides associated with its reform," Mr Highfield said in the submission.

“As a result, Australia is ‘stuck with’ an over-reliance on direct taxes, the anomalous tax treatment of some goods and services, inefficient state taxes, and a GST that is relatively expensive to administer, given its relatively low rate and narrow base that limit its revenue raising potential.

“GST revenue (net of administrative costs) is already fully distributed to the states and there would seem to be a fairly compelling logic to GST base broadening and a slightly higher rate (eg 12.5 per cent) as a means of rationalising the major state taxes and compensating low income citizen that would otherwise be unfairly impacted by GST expansion," he added.

In his last speech as Australia’s productivity commissioner, Gary Banks also highlighted changes to the GST as a key part of taxation reform.

“Making better use of the GST, by broadening its coverage and raising its rate as in a number of other OECD countries (including New Zealand), would likely deliver additional gains," he said.

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“I think the government needs to be a bit more open-minded about the possibility of expanding and increasing the GST for a start. The tax base has been gradually eroded for a time, and it’s very focussed on capital gains which is not something we’ve seen a lot of recently," Mr Bloxham said.

“Previous political promises not to tamper with the GST or lift its rate means governments haven’t been willing to consider it. But our revenue base is being eroded and we need to be focused on how that will be remedied."

The government has steadfastly ruled out tweaking the GST, despite calls from business groups, tax experts and independent MPs for a review.

The Henry review of the taxation system was barred from including the GST in its otherwise “holistic" analysis, leading it to come up with a clever replacement in the form of a cash-flow tax.

GST was also officially off the table at the tax forum – not that it stopped bodies like the OECD from raising it.

Research commissioned by CPA Australia for the forum showed that an increase in GST to between 12.5 and 20 per cent would contribute $1.6 billion to $4.7 billion towards living standards each year.

Conducted by KPMG Econtech, the research revealed that the increase could fund trimming or entirely scrapping inefficient state taxes, including insurance taxes, motor vehicle taxes and stamp duty.

Changing the GST presented the only “viable option" for slashing the inefficient taxes, CPA Australia submitted.

University of New South Wales tax professor and participant at the tax forum, Chris Evans, said that there was a need for tax reform in Australia.

“We’ve got a blueprint for it, so perhaps we should be listening to what the OECD says," he said.

That blueprint was the Henry review. “It’s there, sitting on the shelf, waiting to be dusted off," Professor Evans said.

The government has cherry-picked the Henry recommendations. Among those adopted was the key recommendation, the minerals resources rent tax. But the government did so in such a flawed way, Mr Evans said, that he was not sure that it could fix it.

The GST has to be thrown into the overall Henry mix of reforms, he added.

“At the moment the GST system is doing far less work than it probably should be," he said, admitting that the issue was a “thorny" one.

GST has failed to become the growth tax promised due to generous exemptions for food, health, education, financial services and other purchases that leak more than $16 billion a year. Its 10 per cent rate remains unchanged after 12 years.

The consumption tax makes up 14 per cent – $48 billion – of the nation’s $339 billion tax receipts; less than corporate income tax ($71 billion) and personal income tax ($160 billion).